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7 Tax Tips for the Freelance Economy

How to Handle Taxes as a Freelancer - TaxAct Blog

Tax season feels eons away for many gainfully employed workers.

Why bother thinking about W-9s that will come in January when Halloween, Thanksgiving and Christmas are all arriving before tax forms.

Not to mention New Years, Valentine’s Day and St. Patrick’s Day all happen before taxes are even due.

But for some workers, tax season is marked by three-month periods, not April 15 .

Handle Taxes as a Freelancer - TaxAct Blog

Paying quarter vs. annually

“I do pay quarterly,” says Kali Hawlk, a freelance content marketing manager. Hawlk also pays estimated taxes via IRS Form 1040.

Freelancers, an ever-growing portion of the workforce, get the distinct pleasure of being their own bosses, but in turn have to take on far more financial responsibility.

And with that responsibility comes a duty to pay the government its cut – often higher than those of company employed individuals.

“As someone who’s self-employed, you no longer have anyone who takes care of your withholdings for you,” explains Hawlk. “You have to account for federal and state taxes, along with the employee and employer halves of Social Security and Medicare taxes. It’s a lot more responsibility to keep up with what you owe when you’re self-employed.”

While she loves being her own boss, Hawlk admitted a common frustration of being self-employed is the need to earn more than when she was an employee.

According to Hawlk, freelancers need to earn 25% more than their gross income as employees in order to account for extra taxes and expenses. Tweet this

Don’t let the feeling of a windfall deceive you

Freelancers fill out tax forms required by their clients, but often those clients don’t withhold any taxes from a paycheck.

“It’s sometimes nice to get that fat paycheck until you realize how much of it goes to Uncle Sam,” explains Tonya Stumphauzer, founder of Budget and the Beach.

Remember, a large portion of that income needs to be set aside for taxes so you aren’t in the lurch when quarterly taxes are due.

How do you stay organized?

Freelancers need to have impeccable organizational skills – at least when it comes to bookkeeping. It’s important to keep track of all receipts, invoices, tax forms and expenses.

“I use Nutcache to create and track expenses,” says Hawlk. “It’s a very simple but free accounting system. You can make nice, professional looking invoices and quickly see what’s paid and what’s pending.”

Hawlk prefers to track her gross earnings, expenses, net income and retirement contributions in a more old fashion way – an Excel spreadsheet.

Stumphauzer uses another software, but also prefers to keep it simple.

“I use Freshbooks for invoicing,” says Stumphauzer. “But as far as expenses I rely on my bank statements and credit card statements mostly, as well as saving all my receipts in a special folder throughout the year. After six years as a freelancer you’d think I’d have some fancy software, but I don’t.”

Some may hire an accountant, but you don’t have to

Freelancers have a lot of paperwork to keep track of, including Form ES-1040 for paying estimated taxes on a quarterly basis, 1099s and W-9s from clients. Some freelancers prefer to hire an accountant, but the move isn’t necessary.

In fact, TaxAct offers two solutions for the self-employed. Both the Free Federal Edition and Deluxe software include Form 1040 with Schedules C and SE.

It’s a simple interview that asks straight-forward questions about income, losses, expenses, deductions and credits where TaxAct then automatically calculates and enters the data into the appropriate tax forms.

5 Myths about Do-It-Yourself Tax Solutions Debunked - TaxAct

How can freelancers save for retirement and get a tax benefit?

Full-time employees often get the benefit of an employer-matched 401(k) or similar retirement fund. While there isn’t an employer match, Hawlk is always sure to always participate in one big tax-advantage for freelancers.

“Anyone who’s made self-employment income, whether or not you’re full-time or just do work on the side – should open a SEP IRA,” she emphasizes. “Your contributions to this retirement account can be hugely helpful in easing your current tax burden from year to year. Plus, you’ll be socking away money for your future. Win-win!”

I work full-time and just freelance on the side. Do I still have to pay quarterly taxes?

Just because you have a steady 9-to-5 doesn’t mean your freelance work isn’t subjectable to quarterly taxes.

Freelancers Union provides a break down for when a freelancer needs to start paying quarterly taxes:

  • If you paid more than $1,000 in taxes in 2013 (the tax year that just ended), you need to pay quarterly taxes in 2014.
  • If you expect to pay more than $1,000 in taxes in 2014, you need to pay quarterly taxes in 2014.
  • If you paid no income tax in 2013 (or got a refund), you probably don’t need to pay quarterly taxes in 2014.

Be prepared to pay the Piper (or Uncle Sam)

Being a freelancer and self-employed is liberating for many, just remember to have enough saved up for tax season. Tweet this

TaxAct Business maximizes all the deductions you are entitled to with a broad list of business expenses. It walks you through your taxes with easy interview questions. Start for free now or sign into your TaxAct Account.

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About Erin Lowry

Erin is the founder of BrokeMillennial.com, where she uses sarcasm and humor to explain basic financial concepts to her fellow millennials. Erin lives and works in New York City. She's developed quite the knack for finding deals and free events. Connect with Erin on Twitter, Facebook and Google+.